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Should You Record Trademark License Contracts?

There are a range of legal and practical reasons for foreign trademark owners to record licenses of their registered Chinese trademarks with the China Trademark Office (TMO). But recent changes to both the Trademark Law (TML) and other regulations mean that licensors can now avoid the headaches of recordation in most circumstances.

Recordation obligation and procedures

From its entry into effect in 1983 through its most recent revision, the TML has always mandated that contracts for the licensing of registered PRC trademarks be recorded with the TMO.

Detailed Implementing Rules (商标法实施细则, Rules) issued under the TML from 1983 to 2002 provided strict penalties – even including cancellation of the licensed registration – for failure to record. The penalties were removed in 2002 with the issuance of the TML Implementing Regulations (商标法实施条例, Regulations, which superseded the Rules), and remain so after the 2014 revision of the Regulations.

Meanwhile, the State Administration for Industry and Commerce (SAIC) issued Trademark License Contract Recordation Measures on August 1 1997, explaining the formalities for the recordation application process, and requiring that a copy of the contract must be submitted when applying to record.

Following revisions of the TML in 2002 and 2013, and issuance of the Regulations in 2002 and earlier this year, licensors have been left to wonder which provisions (if any) of the Measures remain effective and which are invalid.

Since 1993 licensors were required to record license contracts within three months after execution. However, the current Regulations allow recordation to be handled “during the term of” the license contract.

The Measures also required that such license contracts be translated into Chinese, if in a foreign language. With cross-border license contracts often being either a small part of a larger commercial agreement or a lengthy, comprehensive standalone license, it was also standard practice to create a short-form license that distilled the essential provisions required for recordation, thereby keeping sensitive commercial terms from the TMO and public. Further, the TMO required that a separate application for recordation be submitted for each registered mark licensed under the contract, with the approval process usually taking eight to 18 months.

Given the lengthy timeframe for processing, the (generally) high costs of filing multiple applications, and the need for a bilingual agreement, many licensors were reluctant to record.

Adding to the frustration was the fact that the TMO revised its practices on recordations from time to time, usually without notice. It revised most recently earlier this year, removing the requirement that a copy of the contract be submitted in connection with the recordation application, thereby reducing costs and hassles.

But with the absence of penalties, foreign licensors may ask whether recordation is still advisable. Two main reasons remain: remittance of forex royalties and enforcement.

Royalties

Previously, if a licensor wished to receive royalty payments in foreign exchange from a PRC-based licensee, the contract had to be recorded. This requirement was not mandated by the TML, but rather by guidelines issued by the State Administration of Foreign Exchange (SAFE) that required Chinese banks to review evidence of recordation by the TMO as a condition to transferring forex royalties abroad.

However, in the fall of 2013, SAFE issued new rules governing bank approvals for remitting IP royalties offshore that eliminated the requirement of showing recordation of the trademark license with the TMO. Instead, banks are given discretion to require recordation if they wish, and consistent with a new “know your customer” policy.

Consequently, foreign licensors have been able to receive relatively large sums of royalties without having recorded the trademark license contract with the TMO. (Further, the revised SAFE rules have also made it easier to remit royalties based on licenses of unregistered trademarks, which until late last year had been nearly impossible due to the prohibition under the TML on the recordation of licenses of anything but registered trademarks.)

Notwithstanding this, SAFE rules and bank policies are subject to change, usually without notice. Accordingly, it is still advisable to record trademark licenses with the TMO in case recordation requirements are imposed again, whether by SAFE or individual banks.

Enforcement

The latest revisions to the TML codified an earlier Supreme People’s Court interpretation that provided that an unrecorded license could not be relied upon by a licensee in taking enforcement action against a good faith third party infringer (an “innocent infringer”).

Most foreign licensors do not authorize their PRC licensees to act against infringements. Instead, they typically require licensees to report any infringements, with the licensor having the right (but usually not the obligation) to pursue enforcement measures, including compensation for damages.

If, however, in the license contract a foreign licensor authorizes its PRC licensee to act against infringements (often the case where the licensee is a subsidiary or closely managed affiliate of the trademark owner), it is advisable to record the license and thereby expand the scope of available enforcement targets to include innocent infringers.